Employers could face a spate of consolidation of benefits providers following Vebnet's acquisition of the loss-making 4th Contact. This may be accompanied by lower fees amid fiercer competition for clients.

Benefits technology company Vebnet has already said that it is in talks with a second company to add to 4th Contact, a provider of online flexible benefits software, which it bought last month from Star Technology Services for a maximum consideration of £661,000.

Rumours have linked P&MM Employee Benefits, part of Motivcom, and communication specialist Caburn Hope to Vebnet, but both deny that they are the company concerned. Motivcom is known to be currently looking for new acquisitions, including benefits providers.

Daimler Chrysler, Diamond Trading Company, the London Stock Exchange and Warner Brothers are among 4th Contact's clients affected by the deal with Vebnet. The provider incurred an operating loss of £326,000 and unaudited revenues of £1m for the year ended 31 July 2006. Its clients have been assured that the 4th Contact technology they use will continue to be supported by Vebnet alongside its own platform. Vebnet's rivals, however, are expected to try to poach them.

Roy Platten, benefits manager at Volkswagen, said: "All the assurances I have been given suggest it's business as usual. I will reserve judgement until six months or a year down the line.

"I think we will see more of these mergers and acquisitions taking place in the employee benefits area, whereby some of the smaller ones get bought out by the bigger boys. If there is a lot of over-capacity then that will [also] drive down costs."

AIM-listed company Vebnet refused to reveal the other company it is in talks with. Gerry O'Neill, chief executive of Vebnet, said: "It's one that we have been looking at for a while that we are having discussions with, and they are not a technology player.

"As I look at the [benefits] market and the players, it's not clear that they are all going to survive. I think it will be interesting over the next year or so in terms of the dynamics of the market and whether there is going to be further merger and acquisition activity."

He added that the benefits technology market is still growing but is embryonic, and questioned whether all the players will survive.

"At the SME end of the market, I see more and more people competing in that space, margins coming down all the time and it's probably not a particularly attractive part of the market to be in."

Other key players in the market include Thomsons Online Benefits (TOB) and Motivano.

Alistair Denton, managing director of Motivano, also believes there will be consolidation. "It might take another two-to-three years. If there is going to be consolidation, it does not necessarily mean technology company taking over technology company. I think it could be quite different to that, whereby consolidation comes from consultancies and technology partners getting together."

Michael Whitfield, managing director of TOB, does not think there will be major consolidation in the market. However, he believes there will be further casualties of unprofitable businesses.

Amanda Wilkinson